Amid challenging market conditions, most EPL insurance policyholders have experienced ongoing rate jumps, underwriting scrutiny and limited capacity over the last several years. The immensity of such premium increases and coverage limitations varied based on sector, location, potential exposures and prior losses. Additionally, retention increases became the norm across the segment, with further pressure on primary retention.
Fortunately, these conditions have slightly cooled in the past 12 months, allowing for rate deceleration. According to industry data, most insureds with good claims history encountered premium hikes ranging between 5% and 15% in 2022, while 2023 saw average rate increases hover between 3% and 7%, showcasing signs of moderation. Zywave’s latest Hard Market Conditions Pulse Survey confirmed these findings, as more than three-quarters (75.5%) of insurance brokers and agents reported that their clients’ EPL insurance premiums declined, stayed flat or increased by single digits in 2023. In light of claim frequency and severity falling below initial projections this past year, most EPL carriers have also resumed writing new business.
Going into 2024, most insureds can expect another year of modest rate increases. Yet, it’s important to note that policyholders with poor loss history or who operate in certain states (e.g., California, New York, Illinois, Texas and Florida) and industries (e.g., health care, hospitality, education and retail) may continue to face more substantial rate hikes and coverage restrictions. These challenges will likely persist for high-risk insureds for the foreseeable future. Furthermore, all policyholders can anticipate the segment’s stringent underwriting standards to press on in 2024 and beyond, with a heightened focus on having formalized and functioning risk management measures in place, especially as it pertains to minimizing losses stemming from certain cost-driving trends (e.g., regulatory issues, discrimination concerns and rising employment litigation).
2024 Price Prediction: 0% to +10%
Developments and Trends to Watch
Increased regulatory scrutiny
Within the last few years, the White House and the EEOC have collaborated on various regulatory initiatives to fight systemic discrimination in the employment landscape. Such discrimination refers to workplace policies and procedures that can place underserved groups at a disadvantage (e.g., racial injustices and gender pay disparities). According to the EEOC’s latest report, the agency filed 143 new employment discrimination lawsuits during fiscal year 2023, representing more than a 50% increase from the previous year. Among these lawsuits, 25 were systemic in nature, nearly doubling the number of systemic filings over the past three years. Looking ahead, the EEOC recently released its Strategic Enforcement Plan (SEP) for fiscal years 2024-28, highlighting the agency’s subject matter priorities for the next five years as it works to prevent systemic discrimination in the workplace. Some enforcement priorities from the agency’s new SEP have been priorities previously, while others reflect future goals.
These priorities include eliminating barriers in recruitment and hiring; protecting vulnerable workers and those in underserved communities from employment discrimination; addressing selected emerging issues, such as long COVID-19 and technology-related discrimination; preventing systemic harassment; and preserving access to the legal system by addressing employment waivers, releases, and nondisclosure and nondisparagement agreements. As regulatory scrutiny continues to rise in the employment space, it is all the more crucial for businesses to maintain documented workplace policies and procedures that foster a culture of inclusivity, thus mitigating the risk of systemic discrimination lawsuits and associated EPL losses.
Discrimination concerns
Apart from increased regulatory scrutiny surrounding systemic discrimination, legislation and litigation related to the following forms of employment discrimination have contributed to rising EPL exposures and losses:
- Size discrimination—Federal employment laws currently prohibit workplace discrimination based on a range of protected characteristics (e.g., age, gender, sex, race, religion and national origin); however, these characteristics don’t expressly include height and weight. As a result, some states and municipalities have started implementing new legislation aimed at addressing size discrimination in the workplace. These changes have largely stemmed from employees across the country voicing their support for expanding protected characteristics to include height and weight, thus safeguarding workers from facing adverse treatment due to their size.
At the municipal level, Binghampton, New York, and San Fransisco, California, both revised their municipal codes regarding discrimination to include “height and weight” as protected characteristics. The cities of Madison, Wisconsin, and Santa Cruz, California, updated their municipal codes to include “physical appearance” and “physical characteristics,” respectively, as protected categories. Both Urbana, Illinois, and Washington, D.C., altered their local discrimination laws to include “personal appearance” as a protected characteristic. New York City is the latest municipality to make these legislative changes, passing a new law that bans workplace discrimination based on “an individual’s actual or perceived height and weight.”
At the state level, the Washington State Supreme Court recently ruled that obesity should be included in the definition of “disability” under state discrimination legislation, therefore adding weight as a protected category; states such as Michigan, Massachusetts, New York state and New Jersey have either already implemented or plan to introduce laws that would invoke similar requirements. As more areas follow suit and establish workplace discrimination legislation regarding height and weight, businesses that fail to ensure fair treatment of employees of all shapes and sizes could face significant legal penalties, lawsuits and subsequent EPL losses. - Pregnancy discrimination—While there are various types of gender-based discrimination that women may face on the job, pregnancy discrimination is one of the most prevalent. Pregnancy discrimination refers to the unfavorable treatment of a female job applicant or employee based on pregnancy, childbirth or a related medical condition. Such discrimination can occur during the hiring process, throughout an employee’s pregnancy or upon their return to work. Amid growing awareness of this topic in the workplace, the federal government introduced two new pregnancy discrimination laws at the end of 2022 that officially went into effect in 2023. Although certain federal laws already address pregnancy discrimination, including the Pregnancy Discrimination Act (PDA), the Americans with Disabilities Act (ADA) and the Fair Labor Standards Act (FLSA), this new legislation—namely, the Pregnant Workers Fairness Act (PWFA) and the Providing Urgent Maternal Protections for Nursing Mothers Act (PUMP Act)—aims to enhance existing protections for pregnant employees and working mothers.
The PWFA requires applicable employers to make reasonable accommodations for qualified employees’ working limitations stemming from pregnancy, childbirth or associated medical conditions. This law also expands the definition of a “qualified employee,” allowing accommodations for a larger group of workers rather than only those who qualify for a pregnancy-related disability under the ADA, as previously required by the PDA. The PUMP Act, on the other hand, revised FLSA standards to require applicable employers to give both exempt and nonexempt employees a feasible break time in the year following childbirth to express breast milk as needed. This legislation also requires employers to provide employees with a designated area (other than a bathroom) for expressing breast milk without being seen or disturbed.
Complicating matters, these laws have been accompanied by a rise in litigation. Specifically, media company Bloomberg found that federal pregnancy discrimination lawsuits have surged by 67% since 2016. Although pregnancy discrimination complaints to the EEOC are down, claim settlements stemming from these complaints have skyrocketed. The EEOC reported that such settlements currently total more than $20 million annually, representing more than a 30% increase from the 10-year average. When considering out-of-court settlements, these numbers are likely even higher. What’s worse, legal experts anticipate these trends to continue in the coming years, exacerbating companies’ related EPL exposures and losses. - Pay transparency considerations—The federal government has displayed growing interest in managing the gender pay gap over the last few years, especially as it pertains to passing the Paycheck Fairness Act. If this proposed law eventually goes into effect, it would explicitly address sex-based wage discrimination and introduce further procedural protections to existing federal pay equity legislation, including the Equal Pay Act of 1963 and the FLSA. In addition to these federal efforts, the EEOC included equal pay initiatives in its SEP for 2024-28. Further, some states and municipalities are implementing pay transparency and wage discrimination legislation of their own. In particular, cities across New Jersey and Ohio and states such as Colorado, California, Illinois, Washington, New York, Nevada and Rhode Island have recently introduced laws that require employers to disclose wage and other financial information throughout the hiring process; this legislation is set to go into effect between 2023 and 2025. According to the latest data from the National Women’s Law Center, more than a quarter (26.6%) of employees throughout the country are now protected by pay transparency legislation. As these laws continue to evolve, businesses (especially those with multistate operations) should be prepared to comply with applicable wage equality requirements and take steps to minimize related litigation and EPL claims.
- AI issues—In an effort to help streamline their employment processes, some businesses have turned to AI systems. These systems leverage programmed algorithms and data sets to deliver automated employment decisions, all without the need for human intervention. According to the Society for Human Resources Management, up to 85% of organizations now use AI technology for HR operations, such as recruitment, hiring, performance evaluations and retention determinations. While these systems can certainly offer various benefits to the businesses that use them, such technology may also pose EPL exposures. For instance, AI systems—although intended to provide impartial results—may contribute to discriminatory employment decisions if the algorithms and data sets entered within these systems are biased toward specific groups. Depending on how frequently AI technology is used, biased decisions could occur on a mass scale, presenting multiple avenues for discrimination-based litigation and associated EPL claims. The past few years have already seen several major companies, such as Google and Amazon, held responsible for AI system failings that demonstrated gender biases.
In 2023, the EEOC released guidance aimed at helping employers that use AI technology comply with federal fair employment laws. The new guidance focuses on preventing discrimination under Title VII of the Civil Rights Act (Title VII), which applies to employers with 15 or more employees and prohibits discrimination based on protected characteristics. Such guidance encourages employers to carefully review their hiring decisions and determine whether the use of AI systems to make those decisions may result in a disparate impact on groups protected under Title VII. Along with other federal agencies, the EEOC also recently issued a joint pledge to vigorously enforce Title VII and other anti-discrimination laws as the utilization of AI technology becomes more common. What’s more, 2023 saw the EEOC’s first AI-based discrimination settlement take place, in which a company in New York agreed to pay $365,000 after a lawsuit filed on behalf of more than 200 job applicants alleged that the company’s AI-powered hiring system was set up to automatically reject candidates above a certain age. Considering these developments, it’s imperative for businesses to assess their AI technology for possible biases to mitigate litigation risks and EPL losses.
Tips for Insurance Buyers
- Assess your employee handbook and related policies. Ensure you have all appropriate policies in place, including language on discrimination, harassment and retaliation.
- Implement effective sexual harassment prevention measures (e.g., a zero-tolerance policy and a sexual harassment awareness program), reporting methods and response protocols.
- Promote diversity, acceptance and inclusion in the workplace through routine employee training. Be sure to educate staff on emerging discrimination topics (e.g., pregnancy and size discrimination) and related prevention and response measures. Take any reports of discrimination seriously.
- Document all evaluations, employee complaints and situations that result in employee termination.
- Consult legal counsel for state-specific employee wage and hour guidance, including those regarding pay transparency and wage discrimination laws.
- Evaluate the algorithms for any AI systems utilized within employment processes to prevent discriminatory decisions and ensure compliance with applicable EEOC guidance.